Political Risk Policy Does Not Cover Bankruptcy-Related Losses, Says New York Appellate Court
05.28.15
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(Article from Insurance Law Alert, May 2015)
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Reversing a trial court decision, a New York appellate court ruled that a political risk insurance policy does not provide coverage for losses stemming from a foreign company’s inability to repay a commercial loan due to insolvency. CT Investment Mgmt. Co., LLC v. Chartis Specialty Ins. Co., 2015 WL 2184309 (N.Y. App. Div. 1st Dep’t May 12, 2015).
A group of investing entities issued a $103 million loan to Mexican companies for resort development. In connection with the loan transaction, the entities obtained a political risk insurance policy that provided coverage for two types of losses: (1) losses caused by expropriatory acts by a foreign government (the "Expropriation Clause"); and (2) losses arising from a government’s prohibition on currency transfers (the "Currency Clause"). The policy excluded coverage for losses "caused by or resulting from … insolvency, bankruptcy or financial default." Several years after the loan was issued, one of the borrowers initiated a voluntary insolvency proceeding under Mexican law and ceased making loan repayments. The entities sought coverage under the policy, which the insurer denied. In ensuing litigation, a New York trial court granted the insurer’s motion to dismiss the claims for coverage under the Currency Clause, but refused to dismiss the claims for coverage under the Expropriation Clause. The appellate court modified the order to dismiss all claims against the insurer.
The appellate court ruled that the bankruptcy exclusion unambiguously applied to the claims. In so ruling, the court rejected the argument that the Mexican insolvency proceeding did not constitute a "bankruptcy" because there was no final adjudication under the Bankruptcy Code. Finding this interpretation "overly narrow," the court concluded that "bankruptcy" should be afforded a common sense meaning to include any "court proceeding in which the debtor is afforded judicial protection while it reorganizes or liquidates." Alternatively, the court ruled that neither the Expropriation Clause nor the Currency Clause provided coverage for the losses at issue. The court explained that the application of Mexican insolvency law (including the issuance of a stay in pending litigation) was not an "alteration" of Mexican law as required by the Expropriation Clause. Similarly, the Currency Clause, which covers losses caused by prohibitions on transfers of currency, did not apply because the freezing of loan-related accounts does not constitute a prohibition on the transfer of currency. Highlighting the distinction between political risk policies and credit policies, the appellate court stated:
"[i]f the lenders were concerned about the financial stability of one or more of the borrowers, they could have purchased credit insurance to protect them from the risk of a borrower’s bankruptcy."